A Retail Investors Guide To High-frequency Trading

Investment banks, hedge funds and institutional investors apply high frequency trading as a means of automating trades via the capabilities of high speed computers, normally to enable transact a huge amount of orders at record speeds. Investors can utilize the strength of high frequency trading platforms to triggers millions of orders while scanning multiple markets and exchanges in milliseconds, thus providing that enormous advantage in the open market. Some financial institutions out there try to capture swift moves from currencies to stocks to commodities. Their hunts for signals are in the form interest rates hikes, which could give away possible information on market directions in a short term.

The HFT systems employ the use of advance algorithm in analyzing the markets and can pin point possible trends in milliseconds. The HFT trading system is able to send hundreds of packets of stocks into the financial centers at bid-ask spreads that are of importance to the investor. The high frequency trading system makes it possible for investors to beat and anticipate the market trends, thereby yielding profitable returns on investment.

We have seen financial institutions lobbying for the closest spot to the live exchanges data centers; NYSE Euronext (NYX) has built a 400,000 square foot data center in Mahwah, New Jersey. While the change won’t be noticeable to stock traders or investors, it’s a significant moment for the growing needs of high frequency traders. This is how important the need for speed along fiber optic cables is to this type of money making.

High frequency trading took a center stage in the markets after the introduction of incentives offered by exchanges for firms in a bid to increase market liquidity. These incentives that were being offered to market makers helped exchanges gain the much needed liquidity, as firms that offered this liquidity also saw an increase in profits on positions. The firms also had favorable spread but they incentives as well as spreads only summed up to a fraction of 1% per transaction, but an enormous profit is realized at the end of the day when you factor in the large number of trades per day.

At London Pearson we have succeeded in enabling better execution for our retail investors who use our high frequency trading system, as well as an efficient narrowing of the bid/offer spread, through liquidity reduction display. Our high frequency trading strategies at London Pearson has remained an index for growth in high speed computer trading and also catalyzed by the changes we have seen in regulations over the last two decades. We have noticed the creation of new market centers such as the ECNs and also an increase in competition between the new centers and incumbent exchanges due to regulatory changes.

By: Danny Sulliva

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